Rushcutters Bay Developments Pty Ltd v Dragon Asset Investment Pty Ltd [2017] NSWSC 866 | Case summary

Summary of salient facts

As already noted, the contract for the sale of the four lots was entered into on 27 August 2015. The contract employed the 2005 edition of the Law Society/Real Estate Institute standard form, supplemented by additional clauses 30 to 52. The price was $16 million. The deposit was $1.6 million. Clause 2.2 provided that normally the purchaser must pay the deposit on the making of the contract, that time being essential. However, cl 47 provided for the deposit to be paid as to $200,000 on the date of the contract and as to $1.4 million by 30 September 2015. Clause 47 further provided that if the contract was terminated due to the fault of the purchaser, any portion of the 10% deposit unpaid shall be immediately payable to the vendor. Clause 9 provided that after termination by the vendor following a failure by the purchaser to comply with the contract in an essential respect, the vendor could, inter alia, "keep or recover the deposit (to a maximum of 10% of the price)". The completion date for the contract was 31 March 2016.
The first instalment of the deposit ($200,000) was paid upon exchange of contracts. The second instalment ($1.4 million) was not paid by 30 September 2015.
The parties entered into the First Deed of Variation on 19 October 2015. By that time, the purchaser had paid a further $500,000 towards the deposit. The First Deed of Variation amended the contract by deleting cl 47 and inserting a new cl 47. Clause 47.1 provided for the deposit to be paid as to $200,000 on the date of the contract, as to $500,000 by 30 September 2015, and as to the balance by 30 October 2015, time being essential. Clause 47.2 provided for an option to extend the date for payment of the balance of the deposit which, if exercised, would result in the contract being deemed to be further amended so that both the price of $16 million and the deposit of $1.6 million would increase by $250,000. Clause 47.3 provided for the release of the deposit to the vendor. Clause 47.4 provided that if the contract was terminated due to the default of the purchaser "any part of the deposit unpaid shall be immediately payable to the vendor".
The purchaser exercised the option to extend the date for payment of the balance of the deposit.
On 5 and 6 November 2015 the purchaser paid instalments of deposit of $900,000 and $125,000, such that a total of $1,725,000 had been paid towards a deposit of $1,850,000.
On 8 December 2015 the parties entered into the Second Deed of Variation. The Second Deed of Variation amended the contract by reducing the price to $16,125,000 and reducing the deposit to $1,725,000. That was the amount the purchaser had by that time paid as a deposit.
On 19 January 2016 the parties entered into the Third Deed of Variation. This deed concerned taxation issues which are not material to the present dispute.
As the completion date of 31 March 2016 approached, the purchaser sought additional time. Negotiations ensued. On about 18 March 2016, in the midst of those negotiations, the purchaser obtained a valuation of the four lots (prepared on the instructions of National Australia Bank Ltd for first mortgage purposes). The valuation suggested that the lots were worth only $7.8 million. The valuation evidently posed difficulties for the purchaser in the obtaining of finance to complete the purchase.
In any case, the negotiations continued. The vendor's solicitor sent a draft deed to the purchaser's solicitor on 24 March 2016. Later that day the purchaser's solicitor sent an email to the vendor's solicitor which included the following: The only outstanding issues between the parties is [sic] the payment of the additional deposit and the interest for late completion. It is noted that the Vendor requires the addition [sic] deposit to be paid to reduce the risk associated with our client defaulting. Our client's view is that if he pays an additional $2 million deposit which amount will be released to the Vendor, the Vendor is able to enjoy the benefit of that $2 million. That being the case, the Vendor's loss is limited. In addition, by paying more than 10% deposit, our client has also increased his risk exposure. Our instruction is that our client is willing to pay $2 million without the interest for late completion. Alternatively, our client is also willing to pay the 8% interest for late completion without paying the additional deposit. Our client has assured us that he will be able to complete the contract and will do so as soon as it is ready.
After some further negotiations the parties entered into the Fourth Deed of Variation on 31 March 2016. The Fourth Deed of Variation provided: 1. for the deposit to be increased from $1.725 million to $3.725 million; 2. for the additional $2 million of deposit to be paid as to $250,000 on the date of the deed and as to $1,750,000 on or before 12 April 2016, time being essential; 3. for the completion date to be extended to 15 May 2016; and 4. for the payment of interest for completion taking place after 31 March 2016.
It was recited that the payment of the additional $2 million of deposit was "in recognition of the vendor's increased risks in granting an extension of the completion date". Clause 2 of the Fourth Deed of Variation provided: 2.1 The Purchaser must pay any unpaid portion of the increased Deposit to the Vendor in accordance with paragraph H(b) of the introduction to this Deed. 2.2 The Purchaser acknowledges that pursuant to clause 47.3 of the Contract, the deposit shall be released to the Vendor on payment by the Purchaser. 2.3 The Vendor and Purchaser acknowledge and agree that: (a) the Increased Deposit exceeds 10% of the price under the Contract; (b) if for any reason any portion of the Increased Deposit (Excess Portion) is considered not to be properly part of the deposit, then the purchaser acknowledges and agrees that the Excess Portion is a genuine pre-estimate of the damages that the vendor will suffer from the loss of the Contract. 2.4 The purchaser acknowledges that: (a) usually on termination of a contract for the sale of land in New South Wales by a vendor for the purchaser's default the vendor is entitled to retain the deposit of 10% of the price; (b) the Vendor has agreed to extend the completion date under the Contract at the request of the Purchaser for the benefit of the purchaser; and (c) if the Vendor is not entitled to retain the Excess Portion as part of the deposit or a pre-estimate of damages the Vendor will be disadvantaged, and the Purchaser agrees not to challenge or object to the retention of the Excess Portion as a pre-estimate of damages.
The purchaser paid the $250,000 instalment on 30 March 2016 but failed to pay the $1.75 million instalment by 12 April 2016. The purchaser's failure to pay the $1.75 million on that date was a breach of the contract in an essential respect.
In the meantime, on 11 April 2016, the purchaser's solicitor sent an email to the vendor's solicitor which referred to the "unfavourable valuation". The email continued: Our client most certainly wishes to proceed with completing the contract. However, it may be possible that additional time may be required for our client to obtain funding to complete the purchase. Our client has instructed us to request that in the event that our client cannot have finance in place by 15 May 2016, the Vendor will extend the completion date to 1 July 2016. In consideration of the Vendor granting a further extension, our client will provide a further 10% deposit (in addition to the deposit our client is require [sic] to pay on 12 April 2016).
It seems that the purchaser's solicitor sent a copy of the valuation to the vendor's solicitor on 13 April 2016.
From about 14 April 2016 further negotiations occurred concerning the terms upon which a further extension of the completion date might be agreed. On that day, the vendor's solicitor put forward terms which included the payment of an "additional released deposit of 10%" payable on 15 May 2016, time being of the essence. That was proposed to be in addition to the $1.75 million provided for in the Fourth Deed of Variation, which remained unpaid. On 15 April 2016 the purchaser's solicitor agreed to the term concerning the additional payment.
The vendor's solicitor submitted a draft of a further deed on 20 April 2016. The terms of the deed appear to have been settled by 22 April 2016, but the deed was not executed. Nonetheless, on 27 April 2016 the purchaser paid a further $1 million towards the deposit. The total of all payments made was now $2,975,000.
On 29 April 2016 the purchaser obtained a valuation of the four lots from a different valuer. This valuer stated that the market value was $12.5 million.
On 16 May 2016 the purchaser's solicitor informed the vendor's solicitor that he expected to receive a signed deed within about a week.
The vendor issued a Notice to Complete on 20 May 2016. The notice called for completion to take place by 6 June 2016.
It is clear that the purchaser was still experiencing difficulties in obtaining finance. On 26 May 2016 the purchaser's solicitor informed the vendor's solicitor that the purchaser, having obtained a new valuation, was confident of obtaining finance by 15 August 2016. A timetable of payments totalling $2.35 million to be made during the period 27 May 2016 to 24 June 2016 was proposed. That proposal was not acceptable to the vendor. On 30 May 2016 the purchaser's solicitor asked the vendor's solicitor if completion by 15 August 2016 with time of the essence was acceptable to the vendor. Negotiations continued into June 2016.
On 9 June 2016, in the course of those negotiations, the vendor's solicitor suggested that the monies paid to date be applied to a settlement of lot 136, with the proposed further deposit instalments being applied to the remaining three lots. On 15 June 2016 the purchaser's solicitor indicated that the purchaser was willing to effect a "partial settlement" on certain terms. Based on a total price of $16.25 million and a total area of 2,629m2, a rate per m2 of $6,181.06 was suggested. On 16 June 2016 the purchaser's solicitor sent an email to the vendor's solicitor asking whether the vendor would consider selling lots 136 and 31 for a total of $3.5 million. The vendor was evidently prepared to proceed in that way, and negotiations followed accordingly.
On 24 June 2016 the parties entered into the Fifth Deed of Variation. The Fifth Deed of Variation provided for completion of the sale of the four lots in two stages. Stage 1 involved lots 31 and 136. Stage 2 involved lots 134 and 135. Clause 2.1 of the Fifth Deed of Variation relevantly provided that (subject to cl 2.3): (a) the price is $16,125,000.00, apportioned as set out in clause 2.2; (b) the deposit is $5,612,500.00, apportioned as set out in clause 2.2; (c) the date for Stage 1 Completion is 24 June 2016 (time being essential); (d) the Purchaser will make further payments as follows (time being essential), to be released to the Vendor forthwith on payment: (i) $850,000.00 on 24 June 2016, allocated in accordance with clause 2.4(b)(ii); (ii) $1,000,000.00 on 7 July 2016, allocated in accordance with clause 2.4(b)(iii); and (iii) $1,312,500.00 on 15 July 2016, allocated in accordance with clause 2.4(b)(iv). (collectively referred to as the 'Further Amounts'); e. the date for Stage 2 Completion is 26 August 2016 (time being essential); By cl 2.5 it was agreed that the contract will be altered as necessary to give effect to cl 2.1. Clause 2.6 of the Fifth Deed of Variation provided that in all other respects the parties "confirm the terms of the Contract".
Clause 2.2 of the Fifth Deed of Variation provided: 2.2 On and from the date of this deed the price and the deposit under the Contract are apportioned as follows; Lots 31 & 136 Price $3,500,000.00 Less deposit -$2,975,000.00 Sub-total (subject to adjustments): $525,000.00 Less amount paid under -$850,000.00 clause 2.1(d)(i) of this deed Balance on completion -$325,000.00 (subject to adjustments) Lots 134 & 135 Price $12,625,000.00 Less deposit -$2,637,500.00 Balance on completion $9,987,500.00 (subject to adjustments)
Clause 2.4 of the Fifth Deed of Variation provided: 2.4 The Vendor, Purchaser and Guarantor acknowledge and agree that: (a) prior to the date of this deed the Purchaser has paid a total amount of $2,975,000.00 to the Vendor on account of the deposit under the Contract (Initial Amounts); (b) on the date of this deed the Initial Amounts and the Further Amounts are allocated as follows: (i) the Initial Amounts are allocated to the deposit under the Contract in respect of Lots 31 and 136; and (ii) the first instalment of the Further Amounts in the sum of $850,000.00 is allocated as follows: (A) as to $525,000.00 (adjusted as necessary to include the payment of interest and other moneys in accordance with this deed and adjustments made in accordance with the Contract): the balance payable on Stage 1 Completion; and (B) the balance: on account of the deposit under the Contract in respect of Lots 134 and 135; (iii) the second instalment of the Further Amounts in the sum of $1,000,000.00 is allocated on account of the deposit under the Contract in respect of Lots 134 and 135; and (iv) the third instalments of the Further Amounts in the sum of $1,312,500.00 is allocated on account of the deposit under the Contract in respect of Lots 134 and 135;
Clause 3 of the deed contained various acknowledgments regarding the deposit. These acknowledgments were in the following terms: 3.1 The Purchaser acknowledges that pursuant to clause 47.3 of the Contract, the deposit shall be released to the Vendor on payment by the Purchaser. 3.2 The Vendor and Purchaser acknowledge and agree that: (a) the deposit exceeds 10% of the price under the Contract; (b) if for any reason any portion of the deposit exceeding 10% of the price (Excess Portion) is considered not to be properly part of the deposit, then the Purchaser acknowledges and agrees that the Excess Portion is a genuine pre-estimate of the damages that the Vendor will suffer from the loss of the Contract. 3.3 The Purchaser acknowledges that: (a) usually on termination of a contract for the sale of land in New South Wales by a vendor for a purchaser's default the vendor is entitled to retain the deposit of 10% of the price; (b) the Vendor has agreed to extend the completion date under the Contract at the request of the Purchaser and the Guarantor for the benefit of the Purchaser; and (c) if the Vendor is not entitled to retain the Excess Portion as part of the deposit or a pre-estimate of damages the Vendor will be disadvantaged, and the Purchaser agrees not to challenge or object to the retention of the Excess Portion as a pre-estimate of damages.
The purchaser made the payment of $850,000 on 24 June 2016 in accordance with cl 2.1(d)(i). That payment enabled completion of the sale of lots 31 and 136 (for $3.5 million) to occur (that is, Stage 1 Completion), with the remaining $325,000 applied towards the $2,637,500 deposit for the sale of lots 134 and 135.
The purchaser failed to make the payment of $1 million on 7 July 2016 as required by cl 2.1(d)(ii). The purchaser also failed to make the payment of $1,312,500 on 15 July 2016 as required by cl 2.1(d)(iii). These are the payments the plaintiff seeks to recover in these proceedings.
On 15 July 2016 the purchaser's solicitor informed the vendor's solicitor that the purchaser was in the course of "finalising the finance", but was experiencing difficulties in raising the deposit required, due to a failure on the part of a debtor to repay money owed to the purchaser. A request was made for further time (until 5 August 2016) for payment of the deposit. However, the vendor terminated the contract on 22 July 2016, based on the failures to pay the two instalments of deposit. The Notice of Termination stated that the deposit "is forfeited to the Vendor".
The plaintiff lodged a caveat over lots 131 and 136 claiming an equitable lien for unpaid purchase price. The plaintiff also took steps to bring about the lapsing of the first defendant's caveat which it had lodged in September 2015 over the four lots and in which it claimed an interest as a purchaser under a contract for sale.
The proceedings were commenced on 12 August 2016. On 16 September 2016, following a contested hearing, the Court refused to extend the operation of the first defendant's caveat, and ordered that the plaintiff's caveat be withdrawn (see Rushcutters Bay Developments Pty Ltd v Dragon Asset Investment Pty Ltd [2016] NSWSC 1324). The Court found that no serious question or prima facie case was established that it would be unconscientious for the plaintiff to rely upon the termination of the contract in answer to the first defendant's claim for specific performance (see at [48]). The Court further found that no serious question or prima facie case arose as to whether the plaintiff had an equitable lien over lots 31 and 136 (see at [55]).
The plaintiff subsequently entered into contracts to sell lots 134 and 135 for a total price of $16.5 million. Those contracts are due for completion on 1 July 2017. The first defendant has sold lot 31 for $1,275,000. The second defendant agreed that, on a price per m2 basis, that price was a lot higher than the price the first defendant paid in June 2016.

Determination

The first issue to consider is whether, on the proper construction of the contract for sale, the vendor is entitled upon termination of the contract due to the purchaser's default to recover the amount of the unpaid instalments of the deposit attributable to lots 134 and 135.
The meaning of the terms of a commercial contract is to be determined objectively, by what a reasonable businessperson would have understood those terms to have meant. That determination requires consideration of the language used by the parties, the surrounding circumstances known to them, and the commercial purpose or objects to be secured by the contract (see Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; [2004] HCA 35 at [22]; Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35]). A commercial contract is to be construed so as to avoid it making commercial nonsense or working commercial inconvenience (see Electricity General Corporation v Woodside Energy Ltd (supra) at [35]). The subjective beliefs or understandings of the parties are not relevant to such questions of construction (see Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52 at [40]). In approaching the question of construction, regard must be had to the whole of the instrument since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious with another (see Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109). Generally, the words of a contract should be construed in a way that gives all of them meaning, and does not render parts inoperative (see Dovuro v Wilkins (2000) 105 FCR 476; [2000] FCA 1902 at [152], citing Re Strand Music Hall Co Ltd; Ex parte European and American Finance Co Ltd (1865) 35 Beav 153 at 159; 55 ER 853 at 856).
It is necessary to consider the terms of the contract for sale as varied by the five Deeds of Variation. Each of those deeds contained a term to the effect that, aside from the particular variations they made, the terms of the contract were "in all other respects confirmed".
Clause 9 of the contract is concerned with the vendor's rights and remedies after termination due to the purchaser's failure to comply with the contract in an essential respect. Clause 9.1 plainly imposes a maximum of 10% of the price upon the amount of the deposit the vendor may keep or recover. Clause 9.1 is not expressly altered by any of the subsequent Deeds of Variation. However, there is tension between cl 9.1 and the terms of some of the provisions later introduced into the contract.
Mr Altan submitted that the existence of a limit upon recovery of unpaid amounts of deposit was confirmed by cl 47 of the contract. Clause 47.1 provided that if the contract was terminated due to the fault of the purchaser "any portion of the 10% deposit unpaid shall be immediately payable to the vendor". However, that submission overlooked the circumstance that by the First Deed of Variation cl 47 was deleted and replaced by a new cl 47. The new cl 47.4 provided that if the contract was terminated due to the fault of the purchaser "any part of the deposit unpaid shall be immediately payable to the vendor". The description of the deposit as a "10% deposit" was thus deleted. That might be explained by the fact that the First Deed of Variation provided that, in certain circumstances, the 10% deposit of $1.6 million would be altered to a deposit of $1.85 million against a price of $16.25 million. (That is, a deposit of almost 11.4% of the price.)
It could be said that cl 47.4 itself evinces an intention that notwithstanding cl 9.1, upon termination for the purchaser's default, the vendor can recover the deposit even if it exceeds 10% of the price. However, for the following reasons, I do not think that is the case.
When the First Deed of Variation was entered into, the remaining $900,000 of the deposit was due and payable on 30 October 2015. If the option was exercised to extend the date for that payment, the $900,000 and an additional $250,000 of deposit would become due and payable on 6 November 2015. If the contract was terminated due to the fault of the purchaser prior to the stipulated date for payment, cl 47.4 would operate so that the unpaid amount of the deposit would become immediately payable. The provision would thereby operate to accelerate the time when the payment became due. The provision would not so operate if the termination occurred after the stipulated date for payment of the unpaid amount. Once that date passes, the amount is payable regardless of any later termination. Where cl 47.4 operates it serves to avoid any argument to the effect that unpaid amounts cannot be recovered because there is no accrued right to do so (see McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 476-7). The provision can, at least to that extent, be seen as one in aid of recovery of the deposit. Moreover, it operates only if the contract is terminated due to the purchaser's breach. Nonetheless, cl 47.4 is not specifically concerned with the extent of the vendor's rights of recovery of the deposit following termination. That subject is specifically dealt with in cl 9.1, which imposes a limit. I do not think that when cl 47.4 operates it overcomes or displaces that limit. I note that Mr Dawson did not place any reliance upon cl 47.4 in support of his argument that the plaintiff was entitled to recover the full extent of the deposit.
Mr Dawson instead relied upon cll 2.3 and 2.4 of the Fourth Deed of Variation, and cll 3.2 and 3.3 of the Fifth Deed of Variation.
The Fourth Deed of Variation provided for the deposit to be increased from $1.725 million to $3.725 million. Clause 2.3(a) records an acknowledgment and agreement that the increased deposit exceeded 10% of the price. Clause 2.3(b) contains an acknowledgment and agreement on the part of the purchaser that if any portion of the deposit was "considered not to be properly part of the deposit" then the so-called Excess Portion is "a genuine pre-estimate of the damages that the vendor will suffer from the loss of the Contract". Clause 2.3 is evidently directed to the question of characterisation of the payments that are referred to in the contract as constituting the deposit, and is an attempt to avoid any Excess Portion being held to be penal in nature.
Clause 2.4 contains further acknowledgements by the purchaser, including that usually on termination for the purchaser's default a vendor is entitled to "retain" the deposit of 10% of the price, and that the vendor would be disadvantaged if it was not entitled to retain the Excess Portion. The clause also records the agreement of the purchaser not to object to "the retention" of the Excess Portion as a pre-estimate of damages. Clause 2.4 clearly proceeds on the basis that, upon termination due to the purchaser's default, the purchaser will not object to the vendor retaining all of the deposit, even though it exceeds 10% of the purchase price. The provisions of the Fourth Deed of Variation are thus inconsistent with cl 9.1 at least insofar as cl 9.1 would otherwise restrict the amount of the deposit that the vendor can keep after termination for the purchaser's default.
Clauses 3.2 and 3.3 of the Fifth Deed of Variation contain acknowledgments and agreements in substantially the same terms as those found in cll 2.3 and 2.4 of the Fourth Deed of Variation.
Mr Dawson submitted that the abovementioned provisions exhibited an intention that upon termination for the purchaser's breach there would be a forfeiture of the deposit, even that part in excess of 10% of the price. (The deposit of $2,637,500 against the purchase price of $12,625,000 attributable to lots 134 and 135 is almost 21% of the price.)
In Howe v Smith (1884) 27 Ch D 89 at 101 Fry LJ stated that a deposit must be paid on some terms implied or expressed. That statement was cited with approval in Commissioner of Taxation v Reliance Carpet Co Pty Ltd (2008) 236 CLR 342; [2008] HCA 22 at [22]. Here, the contract made by the parties contains express terms that deal with the deposit, including cll 2 and 47. Those terms include cl 9.1 which concerns the rights of the vendor after termination due to the failure of the purchaser to comply with the contract in an essential respect. Clause 9.1 speaks of the vendor keeping or recovering the deposit in that situation (up to the specified maximum). Keeping the deposit applies to the extent that the deposit has been paid to or released to the vendor; recovering the deposit applies to the extent that the deposit has been paid otherwise than to the vendor (such as to a stakeholder) or remains unpaid. Whether by means of keeping or recovering, or both, the vendor is restricted to a maximum of 10% of the price.
It is important to note that the provisions of the Fourth and Fifth Deeds of Variation relied upon by the plaintiff to overcome that limit were made in a context where payments of deposit were to be released to the plaintiff. That is what occurred in relation to the $325,000 that remained after completion of the sale of lots 31 and 136. Moreover, as pointed out by Mr Altan, the provisions do not employ the well-known words "forfeit" or "forfeiture". Those words would have been appropriate to include, especially "forfeit" in cl 2.4(a) of the Fourth Deed, and cl 3.3(a) of the Fifth Deed. Nevertheless, the language actually chosen suggests that the provisions are concerned not with forfeiture generally, but with the retention (or keeping) by the vendor of the deposit that is released to it. The provisions are silent concerning recovery of the deposit. It would have been a simple matter to clearly state that recovery of unpaid deposit could occur to the full extent of the deposit, or that the full amount of the deposit would be forfeited.
As already noted, the provisions are inconsistent with cl 9.1 at least insofar as cl 9.1 would restrict the amount of the deposit the vendor can keep. Given that the provisions are plainly concerned with the subject of the retention of the deposit upon termination for the purchaser's default, I consider that those later provisions should be read as prevailing over cl 9.1 (which is part of the standard form) to that extent. However, should those provisions lead to the further conclusion that, upon termination for the purchaser's default, the vendor can recover the deposit so that the limit imposed by cl 9.1 is exceeded?
It would be curious for the parties to agree that the vendor should be allowed to retain the deposit which exceeds 10% of the price, yet remain restricted by cl 9.1 if recovery of the deposit is sought. Such differential treatment of the vendor's rights might be thought to be anomalous. Against that, it must be recognised that the parties have made detailed further provision in the Fourth and Fifth Deeds of Variation about the deposit in the context of termination for the purchaser's breach, but have not employed language that is apt to deal with the subject of recovery of the deposit. The parties, who were both represented throughout by lawyers, must be taken to be aware of the terms of cl 9.1, including that it expressly deals with recovery of the deposit. Clause 9.1 is not mentioned in the provisions of the Fourth and Fifth Deeds relied upon by the plaintiff (although it is one of the terms of the contract otherwise confirmed by the Fourth and Fifth Deeds).
It is one thing to conclude that the subject matter of those later provisions is such that they should be taken to prevail over cl 9.1 to the extent of the inconsistency thereby shown; it is another thing to conclude that cl 9.1 should "give way" to those later provisions in respect of something which, whilst closely related to the subject matter of the provisions, is not actually dealt with in those provisions.
Ultimately I have concluded that, reading the contract as a whole, the better view on balance is that the provisions of the Fourth and Fifth Deeds of Variation do not have the effect of displacing the cl 9.1 limit in circumstances where the vendor seeks recovery of the deposit. Insofar as recovery of the deposit is concerned, cl 9.1 and the later provisions can be read together without inconsistency. The alternative construction would give no operative effect to that part of cl 9.1. It would require the word "retain" to be read as equivalent to "forfeit" (and the word "retention" to be read as equivalent to "forfeiture"). I do not think that departure from the ordinary meaning of the words used would be warranted in circumstances where the parties must be taken to have chosen not to use the well-known words "forfeit" and "forfeiture". Finally, I note that Mr Dawson did not suggest that differential treatment of the vendor's rights to retain the deposit on the one hand, and recover the deposit on the other, renders Mr Altan's construction absurd or lacking commercial sense. I do not think this is a case where something has clearly gone wrong with the language so as to interpret it in accordance with the ordinary rules of syntax makes no commercial sense (see McGrath v Sturesteps (2011) 81 NSWLR 690; [2011] NSWCA 315 at [18]).
I have considered the context in which the contract and its variations were made, including that the Fourth and Fifth Deeds and the higher deposits provided for were negotiated in circumstances where the purchaser was known to be experiencing difficulties in obtaining finance and it was known that the value of the lots might be considerably less than the purchase price. I do not think that this context leads to a different conclusion. The parties made detailed provision, in the manner described above, in respect of the higher deposits, but in doing so did not make further provision in relation to the vendor's rights to recover the deposit.
For the above reasons, I conclude that where the vendor seeks to recover the deposit after termination for the purchaser's breach, cl 9.1 of the contract (and the limit it imposes) continues to operate. Accordingly, the vendor is in those circumstances restricted to a maximum of 10% of the price. In the events which have happened, the terms of the contract permit the plaintiff to recover $937,500. Recovery of the unpaid deposit to that extent means that the plaintiff would keep or recover the deposit in an amount equal to 10% of the price.
No question of penalties arises in these circumstances. It is well settled that forfeiture of a 10% deposit does not attract the jurisdiction of a court of equity to relieve against penalties and forfeitures (see Commissioner of Taxation v Reliance Carpet Co Pty Ltd (supra) at [26]; Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573 at 578-9).
I turn then to the purchaser's claim under s 55(2A) of the Conveyancing Act.
The claim was not referred to in the defendant's cross-claim. Notice of such a claim seems to have first been given in the week prior to the hearing, by means of the defendant's outline of submissions. No objection was taken by the plaintiff to the raising of the claim, and indeed no attempt was made to require it to be formally pleaded or particularised. After Mr Altan completed his closing submissions, the plaintiff declined the opportunity to have the second defendant re-called so as to be further cross-examined on matters concerning the s 55(2A) claim. In these circumstances, the claim was permitted to be advanced.
Section 55(2A) of the Conveyancing Act provides: In every case where the court refuses to grant specific performance of a contract, or in any proceeding for the return of a deposit, the court may, if it thinks fit, order the repayment of any deposit with or without interest thereon.
As explained by Santow JA in Havyn Pty Ltd v Webster (2005) 12 BPR 22,837; [2005] NSWCA 182 at [137], s 55(2A) created a jurisdiction to relieve against forfeiture of a reasonable deposit that was hitherto unknown to courts of equity (see also Luu v Sovereign Developments Pty Ltd (2006) 12 BPR 23,629; [2006] NSWCA 40 at [24]).
In Lucas & Tait (Investments) Pty Ltd v Victoria Securities Ltd [1973] 2 NSWLR 268, Street CJ in Eq stated at 272: It is one thing to recognise that there is a wide discretion conferred upon the court under this section; it is another thing to determine the guidelines for the exercise of that discretion. The section was designed to provide relief to a purchaser against an unjust and inequitable consequence of forfeiture of a deposit. It is clear enough that at law a vendor's right to forfeit a deposit to himself in the event of a purchaser's default bears no necessary relation to the damages actually suffered by a vendor. At law a forfeited deposit could result in a vendor making a profit which in justice and equity he ought not to be permitted to enjoy at the purchaser's expense. In a complementary sense, an order for the return of the deposit does not necessarily affect the vendor's right to sue a defaulting purchaser at law and recover against him such damages as the vendor can prove. The jurisdiction under s 55(2A) does not give to a court an overall discretionary supervision of monetary adjustments between parties to a contract under which a deposit was paid but which has been terminated. A vendor who forfeits a deposit in strict enforcement of his legal rights is not to be deprived of it under s 55(2A) unless it is unjust and inequitable to permit him to retain it.
It is not necessary to demonstrate special or exceptional circumstances in order to justify an exercise of the discretion under s 55(2A) (see Harkins v Butcher (2002) 55 NSWLR 558; [2002] NSWCA 237 at [77]; Havyn Pty Limited v Webster (supra) at [149]). However, a proper approach to the discretion must appreciate the legal context of the established nature of a deposit as an earnest of performance in conveyancing transactions (see Havyn Pty Limited v Webster (supra) at [150]-[151]).
As Santow JA stated in Havyn Pty Limited v Webster (supra) at [155]: For these reasons, I do not consider that there is anything controversial in the submission of the vendor that the grounds in support of an application to repay the deposit must be sufficient to warrant a departure from holding the purchaser to its obligations under the contract. Indeed, this goes to the "justice and equity" of the case, drawing on the observations of Street CJ in Eq in Lucas & Tait. That conclusion must be correct, if the notions of justice and equity conditioning the discretion are to have some meaning drawn from the purpose of a deposit and the circumstances in which it is forfeited. The purchaser must therefore do more than merely show that the deposit has been forfeited, and that it will thus result in a 'windfall' to the vendor as will usually be the case. The Court should not take an approach to ordering the return of deposits under s 55(2A) which weakens the proper function of a deposit in providing a sanction so that purchasers treat the making and completing of contracts with due seriousness: Wilson v Kingsgate Mining Industries [1973] 2 NSWLR 713 at 735, Fraser v L O'Malley & Sons Pty Ltd [1975] 2 BPR 9133 at 9139-40. In so saying, I am not to be understood as putting a gloss upon the plain words of s 55(2A), but merely highlighting the critical importance of a judge exercising the wide discretion according to its plainly beneficial purpose to consider 'justice' and 'fairness' in their proper context. See also the observations of Kirby J regarding the important role played by the payment of deposits in contracts for the sale of land in Romanos v Pentagold Investments Pty Ltd (2003) 217 CLR 367; [2003] HCA 58 at [54].
As noted earlier, the s 55(2A) claim is primarily based upon: 1. various representations made by the plaintiff's selling agents; 2. the price of $3.5 million paid for lots 31 and 136; and 3. the prices subsequently obtained by the plaintiff for lots 134 and 135.
As to (a), the representations were deposed to by the second defendant, Mr Sze. Mr Sze says that during a conversation with the plaintiff's agents held after an inspection of the property in July 2015 he was told that the four lots were together worth $17 million and the owner would not sell for less than $16 million. In the same conversation Mr Sze said that he was not sure that the property was worth $16 million and that he might get the bank to value it first. Mr Sze says that the agent then told him that the lots were definitely worth $16 million, and that the bank will lend 70% of the price.
Mr Sze deposed that a few days later he told the agent that he would "accept $16 million" but did not yet have the $1.6 million needed for the deposit and may need extra time to get his finances ready. Mr Sze says that in response the agent said that he had a good relationship with the vendor, the vendor was flexible about the deposit, would accept the deposit by instalments, and was very flexible about completion. A twelve month settlement period was mentioned, although it was said that the contract would need to show a completion date earlier than 30 June 2016. The agent also said that if the purchaser had difficulties getting its money ready, the issue could be worked out with the vendor, time extensions would not be a problem, and in the worst case extra money or instalment payments may have to be paid "in exchange for more time".
Mr Sze says that based on that discussion he instructed his solicitor to agree to a completion date of 31 March 2016. That was the completion date nominated in the contract that was entered into on 27 August 2015.
Mr Sze deposed that he believed that the vendor would agree to give extensions on request to accommodate him in purchasing the property. It seems that the experience of the negotiations for the First and Second Deeds of Variation reinforced his belief that the agent was true to his word and was influential with the vendor. Mr Sze deposed to further occasions in March and April 2016 when the plaintiff's agents told him that "time can be negotiated".
It has not been shown that any of the statements made about the value of the property were false or misleading. The evidence of the valuations of the four lots obtained in March and April 2016 (of $7.8 million and $12.5 million), and the combined sales price of $16.5 million for lots 134 and 135 obtained following termination of the contract, do not provide a firm basis to make conclusions about the value of the four lots in July 2015. I note further that Mr Sze's evidence reveals that he had some doubt about whether the lots were worth $16 million and considered getting a bank to value the property before proceeding with the purchase. It appears that he decided not to take that step.
No attempt was made to show that the statement about banks lending "70% of the price" was false or misleading at the time it was made.
Mr Sze's evidence suggests that his principal concern was the time it may take to arrange the funds necessary for payment of the deposit and eventual completion of the purchase. The plaintiff's agents made numerous statements to the effect that the vendor would be "flexible" about times for payment and completion, and that extensions of time could be obtained. It was stated that in the worst case scenario the purchaser may have to pay extra instalments in exchange for more time. As is apparent from the narrative of facts set out earlier in these reasons, the vendor was prepared to give numerous extensions of time (see the First, Fourth and Fifth Deeds of Variation) and on some occasions the extensions were agreed to on the basis that the purchaser would make additional payments. There was no significant departure from the position that had been represented. In the end, the completion date (for lots 134 and 135) was extended to 26 August 2016, a date which is approximately one year after the contract was entered into.
Mr Altan did not suggest that the statements made by the agents could reasonably be regarded as representations that extensions would be given "without any end". He submitted, however, that based on the statements, payments continued to be made in the belief that the first defendant would eventually acquire all four lots. That may be so, but the conclusion is inescapable that the ultimate failure of the first defendant to acquire lots 134 and 135 was due to reasons associated with itself, not anything to do with the vendor. The difficulties in raising the funds for the payments of deposit in July 2016 were apparently brought about by the failure of a debtor to repay money owed to the purchaser.
As to (b), the first defendant asserts that the price of $3.5 million agreed to be paid for lots 31 and 136 was excessive. Mr Sze deposed that those lots comprise only 385m2 out of a total area for the four lots of 2045m2. This appears to be based on the areas of the lots, other than the associated car spaces, as set out in the valuation obtained in March 2016). Mr Sze says that based on a total price of $16 million the price of lots 31 and 136 by area is only $2,888,884. Mr Sze says that he was willing to pay $3.5 million for lots 31 and 136 only because he understood that the vendor would sell the other lots to him. Of course, by the terms of the contract as varied, the vendor agreed to do so.
Mr Sze's calculation seems to be wrong. 385m2 is about 18.8264% of 2045m2. Applying that percentage to $16 million gives about $3,012,000. If applied to the actual total price of $16,125,000 it gives about $3,036,000.
Moreover, the price allocated to lots 31 and 136 formed part of the total price of $16,125,000 (which was not altered by the Fifth Deed of Variation). Presumably, if a lower price was allocated to those lots, the price allocated to lots 134 and 135 would correspondingly increase.
I note further that even if Mr Sze is correct in stating that the allocation of a price of $3.5 million to units 31 and 136 was first raised in discussions by the plaintiff's agent, the purchaser's solicitor asked the vendor's solicitor on 16 June 2016 whether the vendor would consider selling lots 136 and 31 for $3.5 million. The allocation of prices was one of many aspects of the transaction that were the subject of the negotiations leading up to the Fifth Deed of Variation.
In these circumstances I do not think that the $3.5 million price ought be regarded as "excessive". It can reasonably be seen as no more than a figure agreed upon by the parties as part of a restructuring of their transaction, presumably in their perceived commercial interests. It should also be noted that the first defendant has since sold lot 31 for a price which Mr Sze accepted was (on a price per m2 basis) a lot higher than the price the first defendant paid to the plaintiff.
As to (c), after the termination of the contract the plaintiff entered into contracts to sell lots 134 and 135 for a total price of $16.5 million. Those contracts are due for completion. If the contracts are completed, the plaintiff will have received a total of about $20 million for the four lots. That is considerably higher (about 24%) than the total purchase price agreed to be paid by the plaintiff. Of course, it needs to be borne in mind that the bulk of the consideration would be received about ten months after the time it would have been received had the first defendant completed the purchase of lots 134 and 135. Further, market prices may have moved significantly in the period since the first defendant agreed to purchase the lots.
It is not possible to conclude on the evidence that the plaintiff has made a profit of a specific amount as a result of the termination of the contract. It does appear likely, however, that the plaintiff will end up better off than it would have been had completion of the sale of lots 134 and 135 to the first defendant occurred (cf Baird v Chambers (2010) 15 BPR 28,337; [2010] NSWSC 272 at [14]-[15]).
I accept Mr Altan's submission that to exercise the discretion under s 55(2A) it is not necessary to find that the vendor engaged in inequitable conduct. All of the relevant circumstances need to be considered in coming to a conclusion that it would be unjust and inequitable to allow the vendor to have the deposit. In the circumstances of this case, I do not think that it would be unjust or inequitable to allow the plaintiff to have the deposit in an amount equal to 10% of the price in accordance with the terms of the contract.
The representations made on behalf of the vendor prior to entry into the contract were not shown to be misleading or deceptive. Indeed, the vendor thereafter acted consistently with the representations insofar as the vendor agreed to several requests on the part of the purchaser for further time.
The purchaser entered into the contract well aware that it risked losing a 10% deposit. The purchaser's solicitor explained that to Mr Sze. The purchaser had the benefit of legal advice throughout, including in relation to the negotiations concerning the Fourth and Fifth Deeds of Variation. There is no reason to think that the purchaser and those associated with it, including Mr Sze, were not in a position to adequately protect their own interests.
As already noted, I do not accept that the $3.5 million the purchaser agreed to pay for lots 31 and 136 can be regarded as "excessive".
The purchaser's defaults in July 2016 which led to the termination of the contract were not brought about by any conduct of the vendor. The purchaser's difficulties were the product of its own financial position. As Mr Altan conceded, the purchaser was never in a position to complete the contract.
The vendor was able to re-sell lots 134 and 135 for considerably higher prices and is thus likely to be better off than had the first defendant completed its purchase of those lots. However, bearing in mind the important role played by deposits in contracts for the sale of land as an earnest of performance (customarily equivalent to no more than 10% of the price), I do not regard this factor as sufficient to warrant the exercise of the discretion in the purchaser's favour (cf Nassif v Caminer (2009) 74 NSWLR 276; [2009] NSWCA 45 at [68]). As stated by Santow JA in Havyn v Webster (supra) at [173] (cited with approval by Sackville AJA in Nassif v Caminer (supra) at [91]) a court "will not lightly be moved to order the return of a deposit paid as an earnest of performance, and forfeited in accordance with the express terms of the contract, when performance does not occur".
Taking all of these circumstances into account, I am not persuaded that this is a case where the Court should be so moved. Permitting the vendor to recover amounts of unpaid deposit in the sum of $937,500 would not in my opinion be unjust and inequitable.
Different considerations would have arisen had the contract allowed the vendor to keep or recover the whole of the stipulated deposit, being an amount approaching 21% of the price. Even if a deposit of that magnitude was found to be justifiable in the circumstances (see Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd (supra) at 580), and its recovery not to be relieved against pursuant to the equitable principles concerning penalties and forfeitures, there would be much to be said for the view that relief under s 55(2A) should be given. This is because the principal reason which might justify such a large deposit, namely, the risk of very substantial loss to the vendor if the purchaser fails to complete, no longer exists. The absence of that risk would make it difficult to maintain that there would be no injustice or inequity in allowing the vendor to keep or recover almost 21% of the price.

Rushcutters Bay Developments Pty Ltd v Dragon Asset Investment Pty Ltd

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